BRUSSELS (AP) ― Eurozone leaders have insisted for months that there is no Plan B ― the currency bloc simply will not break up. But now that their grand strategy to save the 17-nation currency, hatched just a week ago, is in jeopardy, they had better start working on one.
The trouble is their options are limited. If Greek voters reject the deal negotiated last week in Brussels, Greece could have to leave the euro, whether or not its European partners are ready for the devastating consequences of that.
In the short term, the mere existence of the referendum on the horizon will keep uncertainty high in the markets. The eurozone will rely on the European Central Bank to buy the government bonds of financially weak countries like Italy and Spain to keep them out of speculators’ crosshairs. Italy’s bond yields are getting uncomfortably close to the levels that forced Greece, Portugal and Ireland to need bailouts.
Governments in Rome and Madrid will have to fast-track new austerity measures to win much-needed investor trust.
But beyond that, there is very little European leaders can do to avoid what is, after all, an expression of democracy in the country that invented it in the first place.
The 332 million citizens in the eurozone will have little choice but to watch as the Greeks hold their vote and decide the fate of the currency union.
One of the problems is that Europe’s Plan A was extremely difficult to achieve in the first place. All its parts ― cutting Greek debt in half, recapitalizing Europe’s banks, and strengthening the region’s bailout fund by attracting outside investors ― are interlinked.
For that reason, Greek Prime Minister George Papandreou’s plan to call a referendum on the Greek part of the deal affects more than just his own country’s bailout. It puts the whole continent’s crisis-fighting efforts on hold.
European leaders will have trouble convincing cash-rich countries like China to contribute to their bailout fund if its existence is not even certain. And because the new bailout fund needs to be in place before private creditors can take losses on their Greek bonds, that part of the deal is also on ice.
Facing the danger that the whole plan’s edifice may crumble, European leaders could opt to take the hard line and push for the Greek referendum to be canceled.
Some European officials are already playing hardball, suggesting Greece’s rescue loans could be held up until the referendum is complete. Without those loans, Greece would be unable to pay pensions and salaries in two weeks and would default in December.
But starving Greece of money and telling Greeks they ought not to have a voice in decisions that would affect their country for years would likely backfire. It would not only damage the eurozone’s commitment to democratic decision-making, but would also play into the image of the European Union as aloof from the concerns of ordinary people. That might well increase the chances that the referendum would fail.
And those chances are quite real. Voters in Greece, where the economy has been strangled by austerity measures, joblessness and years of recession are in an angry mood.
Whether European leaders will take such an aggressive stance will be clear soon.
French President Nicolas Sarkozy and Germany Chancellor Angela Merkel are meeting Papandreou on Wednesday evening to discuss his decision to hold the vote.
In the end, they will likely take a middle road by asking that the referendum be held as soon as possible. Having the uncertainty of the vote over Europe for months would be too much for the continent to bear. Greece’s latest estimate is for the vote to be held in December.
Whatever approach European countries take with Greece, one thing is sure: the eurozone is in for a rocky few weeks.
